The Bank of England warned that the UK economy is about to stagnate. Hence, it has chosen to keep interest rates on hold at 4.75%. The central bank’s decision aligns with mounting worries about ongoing inflation and the effect of Chancellor Rachel Reeves’s recent tax-raising budget. The bank also cautioned that a poor economic picture is resulting from the budget’s effects and possible worldwide trade conflicts brought on by Donald Trump’s election triumph.
The majority of six to three votes of the rate-setting monetary policy committee (MPC) on keeping rates constant creates extensive pressure on families and companies already struggling with high borrowing costs. This choice emphasizes the bank’s continuous attempts to strike a balance between controlling inflation and the difficulties resulting from slowed economic development.
Why did the Bank of England downgrade the growth forecast?
Apart from keeping rates constant, the Bank of England drastically reduced its estimate of UK growth. From its estimated 0.3% generated in November, the bank now projects zero increase in the last quarter of the year. The MPC cited the £40 billion tax-raising budget of the chancellor as a primary contributor to the downgrades: it contains a notable increase in employer national insurance contributions (NICs).
The committee also underlined growing geopolitical tensions and trade policy uncertainties, particularly given Donald Trump’s election victory and possible world trade battles. The MPC noted, “These developments have generated extra uncertainty around the economic outlook.”
Why Do Inflationary Pressures Not Change Even with Slowing Growth?
The Bank of England’s interest rate decision complicates attempts to boost economic development while inflation is still shockingly high. Though the growth projection is low, inflationary concerns have persisted, especially since November’s headline inflation rate hit 2.6%. The committee observed that the annual salary increase had sped up, adding more reason for worrying about inflation possibly being ingrained.
“It is far from a slam dunk,” one economist said on the probability of a rate reduction. “The specifics of the minutes are cautious and so more hawkish than that six-three headline would indicate.”
Is a rate cut in February?
Though the MPC has decided to keep rates the same, financial markets are projecting a 45% likelihood of a quarter-point rate drop at the next MPC meeting in February. This underscores market predictions that the Bank of England will soon change its policy posture in response to declining GDP and inflationary pressures.
Within the MPC, opinions were split, with a minority advocating an instantaneous 0.25-point cut. Most of the committee, however, voiced worries about a rate reduction running the danger of increasing regularity of inflation.
The Bank of England’s governor, Andrew Bailey, underlined that although the Bank is still open to future rate reductions, care is required given the economic uncertainty. “We believe a slow approach to future interest rate cuts is still appropriate, but given the increased economic uncertainty, we cannot commit to when or by what extent we will lower rates next year,” Bailey remarked.
Why is the UK economy weakening, and what comments are business leaders making?
Recent figures expose a declining trend in UK economic activity. UK output dropped 0.1% in October, with business leaders blaming the chancellor’s budget for the fall in consumer confidence and hiring demand, undermining output.
Business leaders have strongly objected to the £25 billion rise in employer NICs in the budget, slated to take effect in April. They caution that the tax rise may compel businesses to reduce employment or pass on the higher expenses to consumers via more expensive products. According to a recent corporate study, job levels have declined the fastest in four years.
The broader consequences of the budget worry business executives; some worry it would further impede future expansion. The chancellor’s choice to increase taxes to close a public budget shortfall has generated a strong argument, which she ascribed to earlier Conservative policies. “We know businesses are struggling, but these tax rises are required to support public services.” remarked the chancellor. “I understand families still find extraordinary expenses taxing. More money should be in the hands of working people, but only if inflation is steady. I entirely support the Bank of England in reaching that goal.
How Are Investors Responding, and What Are the Stagflation Risks?
Given the possibility of stagflation—when the economy suffers both sluggish growth and high inflation—many investors wonder whether the Bank of England will be compelled to keep high interest rates. We are not persuaded. One analyst said: “We expect growth momentum to remain weak and prices to drift higher over the coming month, but think that the bar to the [Bank] pausing rate cuts is high.”
This situation is causing worries about stagflation, which has historically been challenging to control since politicians have to fight inflation and slow growth simultaneously. Nevertheless, the Bank of England is wary, appreciating the hazy economic scene and indicating readiness to change interest rates as necessary.
What are the global economic pressures, and how might they influence the Bank of England's decisions?
US and European policy officials likewise deal with weak growth and inflation. Though it has signalled that fewer rate cuts are probably in 2025, the US Federal Reserve recently lowered interest rates by a quarter of a percentage point to a range of 4.25% to 4.5%. This choice and political unrest in the eurozone prepare the ground for more forceful European Central Bank action in the next year.
While the Bank of England negotiates these difficulties, its subsequent actions will be closely observed; many analysts believe a rate cut is imminent. But given the uncertainty around world trade, inflation, and the state of the UK’s economy, it is abundantly evident that the road ahead is still riddled with hazards.
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